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Wednesday, 24 January 2018 00:49 - - {{hitsCtrl.values.hits}}
Standard Chartered Bank yesterday projected the Sri Lankan economy to do better this year although cautioning that the country needed to address several external challenges to avoid setbacks.
“We are forecasting a 5% growth in the Gross Domestic Product (GDP) for 2018, up from an estimated 4.5-47% improvement last year,” Standard Chartered Bank South Asia Economist Saurav Anand told a select group of journalists accompanied by visiting the bank’s Chief Economist David Mann, Europe Chief Economist Sarah Hewin and Macro Strategist Mayank Mishra.
A revival in agriculture based on expectant favourable weather is a key driverof higher growth. Last year, the agriculture sector was estimated to have contracted by 3.5%. Improved global growth outlook, up from 3.7% last year to 3.9% in 2018, is expected to help Lankan exports as well.
There is also expectation of improved fiscal management this year with continued growth in Government revenue enabling the Budget deficit to be reduced to 4.8% from an estimated 5.2% last year.
SCB forecasts inflation to be in the 5-6% range and interest rates to be on an upward trend (inclusive of a policy rate hike) to check an untoward increase in private sector credit which the bank expects to be around 13-15%.
A key challenge the country will face is the preparations to serve rising debt servicing with the repayment of sovereign bonds starting from 2019. “Unless managed well, this challenge will have an impact on the country’s foreign reserves,” Anand emphasised.
The estimated oil price of $ 68 per barrel as opposed to the average of $ 55-56 last year is likely to exert pressure on the country’s current account. SCB forecasts the rupee-us dollar exchange rate to be stable at around Rs. 154-156 in the first half but will spike to Rs. 160 in the latter half.
Despite the challenges, Anand acknowledged that the Central Bank had been “proactive” in its approach to managing the looming external vulnerability of Sri Lanka and hence expressed confidence in the monetary authority’s capability of addressing the debt repayment challenge. SCB also expects to remain committed to reducing the fiscal deficit, a course it has made gradual progress with.
On the global prospects, SCB Chief Economist David Mann said: “We are optimistic of global growth.” This view is based on expectations of US and European economies doing better and more importantly emerging economies turning robust and continuing their recovery path following the drop in commodity prices in 2016.
However, there are some risks that were the reason why SCB titled its 2018 report ‘Beware of the Dog’ with the upcoming Chinese New Year being the Year of the Dog.
“There are examples of barks out there that could turn into bites,” he quipped. Separate to the usual risks such as geopolitics, SCB pinned down three important challenges to watch out for in 2018.
Firstly, the Central Bank activities in major markets such as the US Fed, Europe’s ECB and Japan’s BOJ to be way less supportive for markets and global growth by the second half of 2018 than they have been for the past two years. These banks’quantitative easing tapering and exit policies will start to bite, SCB said.
The second risk is a likely slowdown in exports and global trade after a good year in 2017 since last year’s driving factors were temporary such as the price effect and China’s inventory rebuilding cycle. However, the positive factor is electronics and the Internet of Things (IOT) devices sector will remain dynamic.
The final risk factor is what SCB described as “stretched leverage” in many markets as well as with the US Fed likely to go for three rate hikes (two this year and one next year or all within this year). Patches of stretched leverage need to be refocused to ensure funding costs are in check.
SCB’s Chief Economist for Europe Sarah Hewin said the story emerging from Europe and the outlook was positive with business confidence at a record high and stock markets doing well and accommodative management policy and government supporting growth.
In terms of risks, one is ECB stopping QE purchases in September leading to a hike in interest rates in the first quarter of 2019 or if there is upward pressure on inflation the hike could be advanced to later this year.
The second risk is with politics with increased support for populist parties across Europe and less support for established parties. The populist parties are opposed to EU membership and the Euro though general support is positive. Surveys by SCB however have found that expectations are that the Euro will be in existence, hence disintegration fears are very much in the past. A stronger Euro is forecast. According to SCB, UK Brexit talks risk becoming more stressed as the deadline for negotiation looms.
She also said that with the recovery of oil prices, prospects for the Middle East and Africa were positive. SCB expects oil prices to average in the lower $ 60s per barrel in 2018.
Macro Strategist Mayank Mishra said SCB remains bullish on emerging markets as they continue to outperform the rest. “These markets including Sri Lanka offer good value,” he said referring to both sovereign debt and equities.
